Td 8390

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Federal.Register / Vol. Si. No. 18 / Tuesday. January Za. 1992 / Rules and Re~ulations

.--­

~EPARTMENT

OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 snd 602

IT.D.839O)

RIN 1S.S-AP37

Tax Treatment of Salvage and

Reinsurance'
...GENCY: Intemai Revenue Service:
TreaslU)'.
'. .
.... CTION: Final regulations.
SUMMARY: This oocument provides fmal
regelations relating to the trea tment of
salvsge and reinsuran'ce in compu:ing
the deductioidor losses incurred of' ..
i:'lSu:ance companies other than life" .'
insurance companies. Changes 10 the
applicable law were r.1i!de 0)' the
Reve~ue Rc:oncHiation Act of 1990. The
regulations are necessary to pro\'ide
these insurance compi!nies with
guidance needed 10 comply with Ihese
c~anges.
.
E~ECT1VE DATE: The re~ulations apply
10 taxabie years beginnl:lg aiter
December 31. 1989.
FOA FURTHER INFORMATION CONTA~

Kalherine A. Hos50fskY (20:) 56&-;336
'~ot a loll-free call) or Michael J.
Dou8iass (Z02) 56&-3603 ino! a loll-free
call).
SUPPLEMENTARY INFOAMATION:

-_ ...

.Paperwork Reduction Act
7'ne collection of inforr.oalion .
conlained in this final regulation has
been reviewed and approved by Ihe
Office of Managemenl and Budgel in
accordance with the Paperwork .' •
Reduction Act of 1980 (.;.; U.S.C. 3504(h))
cnoe: control number 1S-;~1::7. The
eSlimated average burden per
resoondent is 2 hours..
. These estimales are' an approxim; lion
_o!.:he average lime expected 10 be

ntcesssry for a colleclion of
In[Ol'r.lSllon. They are based on such
informalion as is available 10 the
b!emaJ Revenue Sef"ice, Ir.di\'idua I
respondents may require greater or Jess
lime depending on their particular
circumstances.
Comments reBarding the acc::racy of
Ihis burden eSlimale and suggestions for
reducing this burden should be sent 10
the Internal Revenue Sef"ice, AlIn: IRS
Repons Clearance Officer. T:FP.
Washington. DC 20224. and 10 the Office
of Management and Budget. Attenlion:
Desk Officer for the Department of the
Treasury. Office of Infor::'lation and
Regulatory AC!airs. Washington. DC
20503.
Bacl,,:round
This document sets f~rth final inc~me
lax regulations relalins to Ihe IreBlment
of salvase anc :,einsurance under
section 832(bjl5)(A) of the In lerna) .
Revenue Code. Section 832(b)(5)(A) was
amended by section 11305 of the .
Revenue Reconciliation Ac: of 1990.104
SIaL 1388 (..the 1990 Act'l P:-oposed "
regulations under section B3::(b)(5)(A)
were published in the Federal Retdstcr:
on Mar~ 15. :1991 (56 FR 11127) [FJ-104­
90J. Wntten comments were re'ceived .
from the public. No public hearing was
held because there were no requests for
a hearing. After consideralion oi all the
written COrnIllents received;the .,.•..
proposed regulations'under section
832(b)(5)(A) are sdotlted as modified bv
this Treasury decision.
" •. '
•
Guidance 'rega:,cing certain . .'
implementation issues under section
e32(b1(5)(A) aiso is prtlvided in Rev.
P:-oc. 91-48, 199:1-34 I.R.B. lz..
E.'l:placatioc of Provisions

in General
Section e32(b){3) of the Code defines
the "underw:i:ing income" of an
insurance compan:!,' suciee: to tax cnder
seclion e:n as premiums eamed less
losses in:u:red and extlenses incu:":'ec.
Uncier se:lion 832(b)(.5)(A). ':Iosses
inc:::red" are compuled by laking inlo
accounl paid losses. u."1paid losses. and
salvage and reinsurance. For lax; ble
years beBinning before Januarv l. 199O,
sah'age and reinsu:,ance reco\~erable
was laken into acco\.'nt as a reouction 10
paic losses, For those laxable vea:s. the
ree1ula lions required salvage recove:'a bie
to be laken inlO account only to the
eXlen: Ihatt~e salvage recoverable
could be trealed as 2n essel for stale
5:al::lo::, accounting purposes..
For :axable years beginning efle:
December 31, 1989. :.he 1990 Act
'; .. -,'
amended se:tion 832(bJ:5)(A)10 require·

Federal Re~ister

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':o\. 57, ~o. 18

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T~csciay. Janua~y :8. 199:

I

Rules anc Regulations

3131

ali utir.:ated 5al\'age recoverable
unpaid losses prOvided this amount is
discou:lt this excess lind multiply \he'
(inciucinF that which can:lOI be treated
disclosed 10 the state regulatOr)'
resulting amounl by 87 pcrce:l\.
as an asset for slale statu-tory
authorities.
.
.
.._ -I~ the case of an insurance company'
accounting purposes) to be taken into
The fi:lal re~JallOn! prOVIde :"\lIes for ... sublec.lto tax under section 831. sec::on
," 'acco'unt in computing the deduction for
. making the disciosure. Under Ine final
l!30S[C}{3) of the 1990 Act aHows the
-losses incurred. Under section
insurance compan~' to ceduct 87 pe~cen:
regula tions. a company is allowed. for
8:l:(bJl5)(AJ, paid losses are to be
any I.axable year. to adjust the amount
of the discounted amounl of estimated
reduced by salvose and reinsurance
of unpaid losses shown on its annual
salvage recoverable that :he compan)'
recovered durin; the taxable year. This
statement by estimated salvage
look into account unde~ its method of
amount is adjusted to reOect changes in
recovera.hle only if the company either
accounting for the last laxable year
discounted unpaid losses on nonlife
(i) discloses on its annualslatement. by
beginning before January 1,1990
insurance contracts and in unpaid losses line of business and accident yeer. the
("special-deduction")"In response to
on life insurance ccntracts. An
extent to which estimated salvage
commenlS requesting clariIica tion of the
adjustment is then made to renect any.
recoverable W81 laken inlo account in
propos'ed regula lions. the final
.
changes in discounted estimaled salvage determining the amount of ur.paid losses regulations make clear that I company
recoverable and in reinsurance
shown on the annual .ta tement. 01 (ii).
that claims the special deduction ma)'
recoverable.
.
Iiles a statement with the state
not aiso claim the benefit of aection
. The amendments to the regulations
11305(cj(ZllB} of the 1990 Act.
regulatory authority of each state to
conform the regUlations to the new
. The proposeCl regulations provide that
which the.company is req\lired to submit
treatment of estimated salvage
an annual statement. The slatement
an insurance company claiming the
recoverable required by the 1990 Act.
must disclose. by line of business and
special deduction must be able to
The regclat:ons clarify tha t estimated
accident vear. the extent to which
establish to the satisfaction of the
salvage recoverable includes es:imales
estimated salvage recoverable was
district director that it took estimated
of sal\'age recovera ble tha t may not be
taken into account in computing the
sal\'age recoverabie into account for the
treated as assets for state statutory
unpaid losses shown on Ihe annual,
last laxable year beiore January 1. 1990.
accounting pUr,Joses. See H.R. Con!.
statement. Rules also are provided
Uncer the proposed regulations. a
Rep. No. 964. 101st Cong., 2d Se". 1071
concerning the fonn of the slalement
company may not satisfy thil

(199O}. The regulations also make c1ea:
and the time it must be filed"
requirement merely by stating that

that the term •·..Ivage recoverable"

Transitional Ruies
estimated salvage recoverable is
includes anticipated recoveries on
reflected in the company'. 1051 reserves.
account of subrogation claims arising
By requiring insurance companies to
but may satisfy this reqUirement by
with respect to paid or unpaid losses.
discloliing to the relevant state .
take estimated salvage recoverable into
Under section M6(b)(1). the starting
account in computing lones incurred.
regulatory authority the extent to which
the 1990 Act changed the method by
the company took into account .
point for determining discounted unpaid
which companies compute losses
estimated salvage recoverable in.
losses for Feeeral income tax purposes
incur.ed. Section 11305(c)(Z}(A) of the .
computing paid or unpaid losses
is the amount of unpaid losses,reported
199O,,4,,ct treats this change as a change
(whichever is applicable) on its 1989 .
to state regulato:y authori:ies on the
.....!1Mual statement.
annual statement. This conformity of tax in method of accounting. Section
and annual statement amount•....
11305(c)(2}(B) ol the 1990 Act provides
In response to'comments concerning
discou:ages· companies from ove:sta ting
that an insurance company must take
the .cope of this disclosure provision.
unpaid loues for Federal tax purposes
into account only 13 percent of the
the final regulations clarify the
because the claiming of excess unpaid..
section 481 adjuslme:lt that would
circ:Jrnstances under which disclosure to
losses may have adverse consequences
otherwise have been required as a result slate regulatory authorities will satisiy
lor 5late reg'Ulatory pu:"poses.
of the change in method of accounting.
l.~ili requirement. The final regulations
CotJ:menlators noted that certain
Section 1l305(c}(4) of the 1990 Ac:
provide that the amount of a special
companies had taken estimated salvage
provide~ a rule for overeslimales of the
deduction will be deemed to have been
. recove:able into account in determining
.ection ;81 adjusl.-ne.'1t. Under this rolle.
established to the satisfaction of the
the u::paid losses on their annual,
an insUrance company subject to tax
dis trict director il (i) by September 16­
state:::!ents. For Ibese companies. the
1991. the company !iled with its state
under .ection 831 is reouired to indude
reGuirement in the proposed regulat.ions
in gross income 8i perCent of any
regula lOry authority a statement
amount (adjusted for discountin;} by
disclosing the extent to whic?1 iosses
that estimated salvage recoverable oe
taker. into account sepa:ately in .
which the section 481 adjustment is
incurred for each Ii:le of business shown
compo,:ting 105Se5 incur-ed ;nal' result in
overe!limated. The rule is applied by
on I~e 1989 annual slatemen: wPore
a oou:,ie counting of salvege. In
comparing the 2::,:0.unt oi the !ec:ion ';81
reduced by eSlima lec salvage
resp0:lse to theee comments. the final
. adjustment (dele:-:nined withoul regard
recoverable" and (ii} the company
regulations pe:-:nit a limited exception to - to section 11305(c)(21 of the 1990 Act and agreed. on a stateme:lt at:ached toils
the codonnity require::'lent :! there is
any di.counting) to l.~e .urn ol the acrual
return for ils first taxable year beginning
adeouate disclosure to stete regulatory
salvage recovenes and the remaining
alter December 31. 1989. to apply the
u.'1discounted estima ted salvage
s:lecial rule for overestimate! to the
a uth'o~ties to assure that the pUl1loses
of conformit\' are ac~ieved. Linde: the
recoverable that are attributabie to
a"mount of estimated sal\'age
losses incurred in accidenl years
recoverabie for which it has taken the
final ~guI2tions. a companY,that hu
take:l estimated salvage recoverable .
.beginriing belore 1990. For any taxable
special deduction. If the company is a .
year beginning after December 31. ~989. • member of I consolidated g:oup. each'

inlo a::::ount in determining the amount
any excess of the section 481 adjl.:stment property and casualty insurance

of un;laid loeses reported on the annual
ove: this lium is an overestimale for
.
company that is a member of the

stater.:ent may increase its unpaid
consolidated group must join in the

lesse! [or tax purposes by the amount of purpo.es of sec:ion 11305(c)(4} of the
1990 Act. To determine the amounlto be
agreement 10 appiy the special rule for

estima:ed salvage reco\'erable laken
included in income. it is neceS3ary to
overestimates.

into a::count in determining those
...

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federal Re,:i5teT

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Vol. 57. ~o. 18 / Tuesda~·. January 28. ~Z

I

Rules and Re~u1ations

,
The ,pecial cieduction Wei deslsned
to t::"ea Ie parity between those
'taxpayers that took estimated lalvaBe
recover. ble into account for the 1a,t
taxable year beginnins before January 1.
1990. and Llto~e t?.xpaye:s that did not
take estimated s~l".age recovertible into
account. If the inclusion of estimated
salvage rccovcr:lble did not inc:eese 8
company's taxable income. no spccial
deduction is needed. Accordingly. the •
. finalregulationa provide that an

insurance company that claimed a

"fresh start" bencfit with respect to

. estimated salvege recoverable under
aection 10Z3(e) of the Tax Reform Act of
1986 may not claim the special
deduction under section 1130S(c)(3) of
the 1990 Act to the extent the company
has previously claimed the benefit of a
fresh start.

PART 1-INCOME TAX; TAXABLE
YEARS BEGINNING AFTER
DECEMBER 31. 1953

Paragraph 1. T'ne authority [or parI 1
is amended by remo\'ing Ihe cita lion for
t 1.832-lT and by adding the folJowinS
citation:
AUlhorit)': Sec. 7805. 66A Stat. 91:'; ze
V.S.c. 7llO5' • • Section Ul:;~ alao iuued
urlder:!.ll U.s.C. 83:(b)(S)(AI.
f t.!32-4T

Special Analyses
It has been dctennined that Lhese

rules are not major rules 81 defined in

Executive Order 12291. Therefore. a

Resulatory Impact Analysis is not

reouired.It haa also. been detennined

- that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) and .
the Regulatory Flexibility Act (5 U.S.c.
chapter 5) do not apply to these
..
. regulations. and: therefore. a final
.
Regulatory F1udbjJjty Analysis is not·-·
required. Pursuant to section 1BOS(f) or
the Internal Revenue Code. a copy of the
rules was submitted to the Chief
Counsel for Advoc:lCy of the Small
Busines. Admini'trB ticn for comment on .
their impaa on small business.
DraltiDg Informalioa:,'

T'ne principal authors of these

proposed regulation. are Kathe:ine A.

Ho'sofsky a:ld Michael J. Douglass of

the Orrice of the Assistant Chief

Counsel (Finandallnstitutions and

Products). Internal Revenue Service.

Howe....e:. olbe:- pe:-sonnel from t~e

Internal Revc:lue Senrice and T:-eas~7

Department pa:ticipated in their

developoent.

Ust of Subjects
25 CFR 1.e:Jl-1

Through 1.1!.S2-7'T

: Income taxes. Insurance compenies.
26 CFR Part 602

Rej:lorting and record~eeping

requirements.
.

AdopLioD oE Amendmentll to the

Regulatiool

For the reasons se! out in the

preilmble. Z6 eFR pam 1 and 50: File Typeapplication/pdfFile Modified2009-05-28File Created2009-05-28